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Reprinted with permission of VotanWeb.com
There is probably no part of the buying process that worries a potential buyer more than overpaying for a website. While this is understandable (who wants to pay more than something is worth), it has more to do with misinformation and one's total approach to buying a website than it does to being an expert at appraisals. The truth is, value is completely subjective. After all, what one website may be worth to you is entirely different from what it is worth to the next person. While there are cases where people may not negotiate the best price possible for a good website you must know that no price is cheap enough if you buy the wrong website. In time, a good website will always justify the purchase price whereas a bad one may not ever allow you to recover financially.
What is Value?
In a nutshell, value must be measured by what you are getting in return for your money. You have to equate the purchase price against the benefits you will derive over the term in which you can realistically expect to own the website. As an example, you cannot simply measure the purchase price against the income that you will derive from a specific website. What about the daily enjoyments you will get from being your own boss? Or, the sense of accomplishment you will feel from building something? Maybe, it's the gratification that you will get from contributing to the lives of others (i.e. employees). Perhaps it will come from knowing that from the toils of your labor you have been able to provide certain things for your family that you could never even consider if you were working for somebody else. A good website will provide abundant rewards for you so in order for you to truly measure a website’s value you have to consider all of the benefits that you stand to gain. Also, you must factor in what you could never have achieved if you don't go into business for yourself.
Think of it this way: the average person takes 30 years to payoff a mortgage and 4 years to pay off a car. Neither one of these will pay you a salary. While they both have their benefits, neither one comes close to what you can derive from a good website as far as overall benefits are concerned.
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"Valuing a Website Before You Sell." 123HelpMe.com. 22 Jan 2020
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Traditional Valuation Methods
There are two main valuation methods which are far too complex to fully explain here. These are Asset Based Valuations and Cash Flow Multiples. In the former, a value is attached to all of the assets of a website and you purchase the assets accordingly. Generally, small website purchases do not use Asset Based Valuation Methods to establish the purchase price. For Cash Flow Based Multiples, a formula is used that combines the website’s profits, owner benefits, adds back certain expenses and then applies a multiplying factor to this number to establish a purchase price. This is the method that is most commonly used and a general understanding of accounting principles is required to make this calculation. The multiples that are used are generally based upon what other like websites have sold for but as a very general rule it is usually one to three times the cash flow.
Problems with Traditional Valuation Methods
Despite their ongoing use, traditional valuation methods are so subjective that it is impossible to endorse them as foolproof. For example, there is no way that you can use other like websites as a realistic barometer because no two websites are the same. Furthermore, the financials being used are historical date and since the past is over and done with how can you accurately use the past to predict the future? Insofar as Assets are concerned, unless you fully validate the usefulness of the Assets this too becomes subjective. Notwithstanding the inaccuracies of these methods, you should use a factor of each to value a business from every angle possible and then balance it all with what the value of the business is to you.
No Two Websites Are Alike
Although traditional valuation methods will use other like websites for comparative purposes do not allow yourself to be lulled into believing that any two websites are really alike. You may want to explore these situations to see what websites may have sold for, but you are guaranteed that there are always enough differences to render these comparisons inaccurate. You may want to pull the details on others websites in the same field to see what the Asking Price was, earnings, and expenses, but other than that, remember that just like human beings, every website is unique.
Good versus Cheap
If your intention is to find a cheap website you must be prepared to never find one or to deal with one that may never turn into what you had hoped that it would. It's akin to buying a cheap used car versus a good used car that you have checked over extensively. Yes, there is a chance that you will get lucky and get one that runs relatively trouble free for as long time, but the odds are that you will get one that requires ongoing maintenance. Now, this may be fine for your basic transportation needs but if you need a vehicle to work as a sales rep on the road where down time means lost revenue then you would want a vehicle that is highly reliable wouldn't you? The same applies for a website; there is far too much at stake to buy something just because it's cheap or affordable. Unless you are a website mechanic you will probably spend so much time fixing it that you won't have time to run it. If you want to dramatically improve your chances for success then look for a good website that can become great.
How Long Do You Intend On Working?
If you are 55 years old and only want to work for another 5-10 years, your value will be dramatically different for a certain website than an individual who is 15 years younger. You have to consider your overall health, energy level and the payout period on the website relative to the amount of years that you realistically can and will be willing to work.